Bank Investment Company may be approved in upcoming Budget, finally

The Centre is set to breathe life into the Bank Investment Company (BIC) in the Union Budget 2021-2022, and, simultaneously, start the process of amending the Bank Nationalisation Acts of 1970 and 1980, and the State Bank of India (SBI) Act of 1955.

This will bring to fruition discussions between the Centre and the Reserve Bank of India (RBI), which have been on since June 2020. The Indian Banks’ Association has also figured in some of the parleys.

The lack of fiscal headroom, and the fact that the valuations of these banks are low, have resulted in the Centre’s stake in some of the state-run banks going above 90 per cent (that is, if the Life Insurance Corporation of India’s stake is also taken into account).

The two options before the Centre are: to abstain from participating in the capital-raising plans of these banks, or set up the BIC under the Companies Act (2013) as suggested by the P J Nayak Committee in 2015.

“The second option (BIC) is now being weighed up and is likely to form a part of the Budget proposals upon positive outcome of the deliberations,” said a source.

A key question is how the BIC is to be funded. To start with, it may have to be a wholly-owned government entity. But this would make the BIC’s structure and its objective of being an investment intermediary questionable, added sources.

“Yet, given the limited room for direct capital infusion into some of the banks after three rounds of capitalisation since 2016, it makes sense,” said a source quoted earlier.

Between 2015-16 and 2019-20, the Centre had pumped in Rs 3.56 trillion into these banks through both direct subscription of equity shares and recapitalisation bonds. Their market capitalisation stands a tad above Rs 4 trillion. The end objective would be to make the BIC fall under the public-private partnership model, with the Centre’s stake eventually falling to less than 49 per cent in the holding company.

There is also the question as to whether the government’s stake in all state-run banks is be transferred to the BIC at one go. To adopt the BIC structure, it is imperative these banks come out of the Bank Nationalisation Acts of 1970 and 1980, and the SBI Act of 1955, and be governed only by the Companies Act and Banking Regulation Act of 1949.

“Once these amendments are enacted, it doesn’t matter if the BIC structure is adopted in a one-shot or in a graded manner,” said another source. “The selection of banks to be folded into the BIC is a function of the urgency in capital infusion and the government’s financial comfort,” he added. However, for reasons of parity in operations, the move could be done in one attempt.

The final draft code on private banks may also be presented before the end of 2020-21. This is important, as the BIC will involve private capital, and investors would like to know if corner-room occupants are to have a seat on key committees of a bank’s board — remuneration and nomination, audit committee, and risk management — and senior officials are to report to board-level committees and not to the managing director and the chief executive officer.

Playing in the background is the central bank’s Internal Working Group’s report on extant ownership guidelines and corporate structure for Indian private sector banks. By January 15, the RBI will close its window for receiving views from large companies who may wish to set up banks. Thereafter, it will have to decide whether to issue new licences to companies who want to set up a bank from scratch or to let them pick up equity-strapped state-run banks.